A new age of winners and losers

The federal government announced in February that it was reducing the deeming rates that Centrelink uses to assess eligibility for the age pension. As with many government policies, there are winners and losers.

The two tests applied by Centrelink when calculating entitlement to the age pension are the assets test and income test.

Under the income test, the age pension decreases once the income counted by Centrelink exceeds a low threshold. For every dollar earned over this low threshold, the age pension decreases by 50¢, and ceases entirely once it reaches a cut-off threshold.

There are two sets of threshold used: those that apply to singles and those for couples. The low rate income threshold for single pensioners is $152 a fortnight with the cut- off threshold being $1697.20 a fortnight. For couples, the combined low income threshold is $268 a fortnight with the cut-off threshold being $2597.60.

Changes over the years have made the income test complicated by effectively having the following three different types of income: 1. actual income received; 2. deemed income; and 3. adjusted actual income received.

Included in the first category are such things as employment income, work-related fringe benefits, net business income, income distributed from trusts and private companies, amounts salary sacrificed as super contributions, net rental income and income received from boarders and lodgers.

Advertisement

The second category of deemed income was introduced to stop people artificially decreasing their income from financial investments. The most common type of financial assets counted for deeming include bank, building society and credit union accounts; term deposits and debentures; managed investments; listed shares and securities; gold and other bullion; and superannuation account balances when the member is of pension age.

Rather than counting the actual income received from financial investments, an income is deemed to be earned. Where pensioners earn less than the deemed income they are worse off; where they earn more they are better off.

Before the recent change, the deeming rates used for singles were 3 per cent a year on the first $43,200 of financial assets and 4.5 per cent on the excess. For couples, the deeming rates were 3 per cent a year on the first $72,000 of combined financial assets and 4.5 per cent on the excess.

You will now receive updates fromMoney Newsletter

Money Newsletter

The new deeming rates applying now are 2.5 per cent on the lower threshold and 4 per cent on the higher.

The losers from the reduction in the deeming rates were those pensioners who have their money in bank deeming accounts. This is because the actual interest income they earn has decreased by 100¢ in the dollar, but their pension has increased by only 50¢ in the dollar.

Winners from the decrease in deeming rates are those pensioners investing in financial assets producing income higher than the deeming rates. These can include direct shares, term deposits, listed property trusts and pooled mortgage trusts.

Age pensioners investing in these higher yielding types of financial assets have not only seen an increase in the age pension they receive, as a result of the decreased deeming rates, but in many cases have seen the income they receive remain the same.

The third type of income counted by Centrelink, adjusted taxable income, can result in a person maximising their age pension while still receiving a high level of income from their investments. Under this category Centrelink allows the actual income received to be reduced by their purchase price. The most common example is a superannuation pension.

A reduction for this purchase price is allowed because over the life of the super pension some of the original capital value of the superannuation account will be paid back.

How this purchase price of a super pension works, and how to maximise your entitlement to the age pension, will be detailed next week.